Options Expert Tackles the Penn West Case

A financial puzzle went unsolved for about 10 years before Professor Erik Lie came along in the middle of the past decade. He spent months sorting out how thousands of executives in the United States ended up with favourably priced stock options. Now Canadian companies are in his crosshairs.

Mr. Lie (pronounced Lee) is the head of the finance department at Tippie College of Business at the University of Iowa. Like many academics, he has been assigned standard professor descriptions over the years: "unassuming academic" by the Wall Street Journal in 2006; "modest" by the Houston Chronicle that same year; and "mild-mannered" by The Globe and Mail in 2007.

But his work? Explosive.

Mr. Lie was in his late 30s when his research on backdating options made him famous around 2005. He reckoned that thousands of companies used hindsight to assign favourable exercise prices for stock options—a practice known as backdating. Mr. Lie tested his theory using mathematical models and in 2007 told ABC News he "caught" about 8,000 companies toying with stock option prices. He has served as an expert witness before the United States Senate's Banking Committee to discuss backdating, and the U.S. Securities and Exchange Commission has consulted with him.

Now, at least one Canadian energy company,Penn West Petroleum Ltd., is facing backdating allegations in a lawsuit supported by an investigation conducted by Mr. Lie. His work has already led to a group of former insiders at Ensign Energy Services Inc. settling backdating allegations in April, paying about $4.37-million back to that company. His most notable work in Canada so far was tied to backdating at Research In Motion Ltd., now BlackBerry Ltd.

Figuring out the backdating issue began in the 1990s with research by David Yermack, a finance professor at New York University. His work showed that several companies were awarding options and then seeing the stock price rise after the grant date. He believed executives were using insider information to pick the dates, knowing positive news was in the works which would drive up the price. (This is known as spring-loading).

But in 2002 Mr. Lie proposed that it was hindsight, rather than foresight, that allowed executives to end up with favourably-priced options, according to the Daily Iowan, the University of Iowa's newspaper. "When I first heard of [Lie's backdating theory], I thought it was so unlikely," Mr. Yermack told the newspaper in 2006. "Lie really deserves a lot of credit for thinking so creatively on this."

Mr. Lie has collected oodles of credit. He made Time magazine's list of the world's 100 most influential people in 2007; was named one of the the top 30 most influential people on Wall Street by SmartMoney magazine in 2006; listed as one of the top 10 "disrupters" in 2006 in Forbes magazine; and made one of the top five news makers in 2006 by Workforce Management magazine.

"I don't think you can understate what he's done," Adam Pritchard, a former attorney at the SEC told the Houston Chronicle in 2006. "There would be no issue right now if he had not done this research."

Mr. Lie declined to speak with The Globe because the Penn West case is before the courts. (None of the allegations against Penn West has been proven in court. The Ensign case was a settlement, not a regulatory fine.)

Mr. Lie grew up south of Oslo, Norway, in a town called Porsgrunn, and went to the University of Oregon on a student visa in 1988, according to the Daily Iowan. He was just 19 years old. "Old enough to drink at home but not old enough to drink here," he said.

Mr. Lie, who spent two years in the Norwegian Navy, estimated that 10 per cent of stock options belonging to senior executives may have been backdated between 1997 and 2002, before Sarbanes-Oxley legislation kicked in, according to the Sunday Times in 2006.

"A lot of people have lost their jobs," Mr. Lie told Workforce Management magazine in 2006. "A lot of good people do stupid things. They should be held accountable, but it is still sad."